Circulation numbers

Circulation Numbers

Circulation numbers are a fundamental concept in Technical Analysis used to identify potential trading opportunities based on the frequency of price movements. They represent the number of periods (candlesticks) it takes for a price to move from one significant level to another. Understanding circulation numbers can provide valuable insights into market momentum, potential reversals, and the overall health of a Trend. This article will provide a comprehensive introduction to circulation numbers, covering their calculation, interpretation, application in trading strategies, and their relationship to other technical indicators.

What are Circulation Numbers?

At its core, a circulation number quantifies the 'effort' required for a price to reach a specific target. It's not about the *amount* of price change, but the *number of periods* it takes to achieve that change. A low circulation number suggests strong momentum and a rapid move, indicating a potentially powerful trend. Conversely, a high circulation number implies weak momentum and a slower, more labored move, potentially signaling a weakening trend or an impending reversal.

Imagine a stock price moving from $10 to $12. If this happens in 5 days (5 candlesticks), the circulation number is 5. If it takes 20 days, the circulation number is 20. The difference in circulation numbers paints a drastically different picture of market sentiment. The faster move (5) suggests strong buying pressure, while the slower move (20) suggests either limited buying interest or significant resistance.

How to Calculate Circulation Numbers

Calculating circulation numbers is relatively straightforward. You need to identify two significant price levels:

1. **Starting Point:** A recognizable swing low or a previous resistance level that has been broken. 2. **Target Point:** A recognizable swing high or a previous support level that is being targeted.

Once these points are identified, simply count the number of candlesticks (periods) between them. That count is the circulation number.

Example:*

Let's say a stock is trading at $50. It then rallies to $60 over the course of 12 trading days. The circulation number for this rally is 12.

It's important to use consistent candlestick timeframes when calculating circulation numbers. For example, if you're using daily charts, count the number of *days* it takes for the price to move. If you're using hourly charts, count the number of *hours*. Mixing timeframes will render the calculation meaningless.

Interpreting Circulation Numbers

The interpretation of a circulation number is context-dependent, but some general guidelines apply:

**Low Circulation Numbers (1-10):** These indicate strong momentum, rapid price movement, and potentially a strong trend. They suggest substantial buying or selling pressure. These are often seen during breakthrough moves or in highly volatile markets. These movements are often associated with Breakout Strategies. A very low number (1-3) can even suggest a 'panic' move.
**Medium Circulation Numbers (11-20):** These represent moderate momentum and a more measured pace of price movement. They are common in established trends where the price is steadily moving in one direction. These numbers often indicate a healthy trend but may also signal a potential slowing of momentum. Consider using Moving Averages to confirm trend strength.
**High Circulation Numbers (21-30+):** These suggest weak momentum, a slow and labored price movement, and a potentially weakening trend. They often indicate significant resistance or support, or a lack of strong buying or selling interest. High numbers often precede Reversal Patterns. They can also indicate consolidation phases where the market is indecisive.
**Very High Circulation Numbers (50+):** These are rare and usually indicate a very strong counter-trend force or a prolonged period of consolidation. They often signal a potential major reversal. These are often seen in sideways markets and require careful analysis using Support and Resistance.

It's crucial to remember that these are just guidelines. The interpretation of a circulation number should always be considered within the broader context of the market, including the asset's historical volatility, the overall economic conditions, and other technical indicators.

Circulation Numbers and Trading Strategies

Circulation numbers can be incorporated into a variety of trading strategies:

**Trend Confirmation:** Use circulation numbers to confirm the strength of an existing trend. Low circulation numbers on upward moves confirm a strong bullish trend. Low circulation numbers on downward moves confirm a strong bearish trend.
**Reversal Identification:** High circulation numbers can signal potential trend reversals. Look for a high circulation number followed by a change in price direction. Combine this with Divergence in oscillators like RSI or MACD for greater confirmation.
**Breakout Trading:** When a price breaks through a resistance level, a low circulation number suggests a strong breakout with the potential for further gains. However, a high circulation number might indicate a false breakout. Utilize Volume Analysis alongside circulation numbers.
**Continuation Patterns:** Circulation numbers can help identify continuation patterns. For instance, after a consolidation phase (e.g., a triangle), a breakout with a low circulation number suggests the trend is likely to continue.
**Fibonacci and Circulation Numbers:** Combine circulation numbers with Fibonacci Retracements to identify potential areas of support and resistance. A low circulation number reaching a Fibonacci level can indicate a strong move.

Circulation Numbers and Other Technical Indicators

Circulation numbers work best when used in conjunction with other technical indicators. Here's how they relate to some common indicators:

**Moving Averages (MA):** A strong trend, confirmed by a low circulation number, should also be supported by a clearly defined moving average. The price should consistently stay above the MA in an uptrend and below the MA in a downtrend. Explore different MA periods like Simple Moving Average, Exponential Moving Average, and Weighted Moving Average.
**Relative Strength Index (RSI):** An RSI reading above 70 (overbought) combined with a low circulation number suggests a potentially unsustainable rally. Conversely, an RSI reading below 30 (oversold) combined with a low circulation number suggests a potentially unsustainable sell-off. Understanding RSI Divergence is also crucial.
**MACD (Moving Average Convergence Divergence):** A bullish MACD crossover combined with a low circulation number confirms a strong bullish signal. A bearish MACD crossover combined with a low circulation number confirms a strong bearish signal. Analyzing MACD Histograms can provide additional insight.
**Bollinger Bands:** A price breakout above the upper Bollinger Band with a low circulation number suggests a strong bullish move. A price breakout below the lower Bollinger Band with a low circulation number suggests a strong bearish move. Utilize Bollinger Band Squeeze to identify potential breakout opportunities.
**Volume:** High volume accompanying a low circulation number strengthens the signal. Low volume with a low circulation number might suggest a weaker signal. Consider using On Balance Volume (OBV) for further analysis.
**Ichimoku Cloud:** A price breaking through the Ichimoku Cloud with a low circulation number signifies a strong trend change. The Cloud's components – Tenkan-sen, Kijun-sen, Senkou Span A, and Senkou Span B – provide additional confirmation. Learn about Ichimoku Cloud Strategies for comprehensive application.
**Pivot Points:** A low circulation number reaching a pivot point (support or resistance) can indicate a strong breakout. Pivot Point Calculation and interpretation are vital.
**Elliott Wave Theory:** Circulation numbers can assist in identifying the length and strength of waves within an Elliott Wave pattern.
**Candlestick Patterns:** Strong candlestick patterns (e.g., engulfing patterns, hammer, shooting star) combined with low circulation numbers can provide high-probability trading signals. Candlestick Pattern Recognition is key.
**Average True Range (ATR):** ATR measures volatility. A low circulation number coupled with a high ATR suggests a rapid, volatile move. Understanding ATR Bands can enhance your analysis.
**Donchian Channels:** Breakouts from Donchian Channels with low circulation numbers are considered strong signals. Explore Donchian Channel Strategies.
**Parabolic SAR:** A price crossing the Parabolic SAR with a low circulation number can signal a trend change. Parabolic SAR Optimization is essential.
**Chaikin Money Flow (CMF):** CMF measures buying and selling pressure. A low circulation number coupled with a strong CMF reading confirms the trend's strength. Learn about CMF Divergence.
**Stochastic Oscillator:** Similar to RSI, Stochastic Oscillator divergence combined with circulation numbers can improve signal accuracy. Stochastic Oscillator Settings should be tailored to your trading style.
**Williams %R:** Williams %R, another momentum oscillator, can be used in conjunction with circulation numbers for enhanced analysis. Williams %R Interpretation is vital.
**Harmonic Patterns:** Circulation numbers can help validate the strength of harmonic patterns like Gartley Patterns, Butterfly Patterns, and Bat Patterns.
**Keltner Channels:** Breakouts from Keltner Channels with low circulation numbers are strong signals. Keltner Channel Trading Strategies can be effective.
**Heikin Ashi:** Heikin Ashi charts smooth price data, making trend identification easier. Combine them with circulation numbers for a clearer picture. Heikin Ashi Candle Interpretation is important.
**Renko Charts:** Renko charts filter out noise, focusing on price movements. Circulation numbers on Renko charts can reveal trend strength. Understand Renko Chart Settings.
**Point and Figure Charts:** Point and Figure charts focus on significant price changes. Circulation numbers can help confirm the momentum behind these changes. Point and Figure Chart Construction is necessary.
**VWAP (Volume Weighted Average Price):** Breaching VWAP with a low circulation number can signal a strong move in the direction of the breakout. VWAP Applications are diverse.
**Ichimoku Kinko Hyo Cloud with Fibonacci:** Combining these two powerful tools offers robust analysis. Fibonacci and Ichimoku Combination can pinpoint high-probability trading setups.
**Market Profile:** Market Profile helps understand market value areas. Circulation numbers can highlight how quickly price moves through these areas. Market Profile Concepts are essential for understanding market behavior.
**Fractals:** Combining Fractal identification with circulation number analysis can provide early entry points. Fractal Trading Strategies rely on pattern recognition.

Limitations of Circulation Numbers

While a valuable tool, circulation numbers are not foolproof. Here are some limitations:

**Subjectivity:** Identifying significant price levels can be subjective. Different traders may identify different starting and target points, leading to varying circulation numbers.
**False Signals:** Circulation numbers can generate false signals, especially in choppy or unpredictable markets.
**Lagging Indicator:** Circulation numbers are a lagging indicator, meaning they are based on past price data. They don't predict the future, but rather reflect past performance.
**Market Specific:** What constitutes a "low" or "high" circulation number can vary depending on the market and the asset being traded. A circulation number that is considered low for a stock might be high for a currency pair.

Conclusion

Circulation numbers are a powerful tool for analyzing market momentum and identifying potential trading opportunities. By understanding how to calculate and interpret them, and by combining them with other technical indicators, traders can improve their decision-making and increase their chances of success. Remember to always practice risk management and to trade responsibly.

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